Sembler Giveaway: School Money to be Siphoned

An S.C. Senate bill that would give sales tax rebates to the developer of a proposed Jasper County mega-mall relies on a state law that designates those revenues for school purposes, a review by The Nerve has found.

Under the bill (S. 1054), sponsored by Sen. Clementa Pinckney, D-Jasper, three-fourths of eligible sales tax revenue generated by the proposed Okatie Crossings mall would be refunded to the county, which, in turn, could be returned to Florida-based Sembler Co., the mall’s developer. The amount of estimated incentives, according to several lawmakers, ranges from about $134 million to nearly $175 million.

But The Nerve’s review of the bill found that the proposed refunds might contravene a state law that designates most of the state’s sales tax for school building projects. Section 12-36-2620 of the state code, which the bill cites, requires that:

A 4-percent sales tax "must be credited as provided in Section 59-21-1010 (A)," which requires that those revenues be "credited to the state public school building fund for the purposes provided for in Article 3 of Chapter 21 of Title 59." Under that article, revenues can be used to pay off state school capital improvement bonds and provide grants to school districts to pay for building projects approved by the state Board of Education.

A 1-percent sales tax "must be credited as provided in Section 59-21-1010 (B)," which requires that those revenues be deposited in the "South Carolina Education Improvement Act of 1984 Fund as a fund separate and distinct from the general fund of the State."

The state’s general sales tax is 6 percent. The other penny of the sales tax, which was passed in 2006 to replace school-operating property taxes on owner-occupied homes, is not covered under Section 12-36-2620.

The Sembler bill has passed the S.C. Senate Finance Committee, and debate on it likely will resume today on the Senate floor.

Current sales tax law does not allow for refunds to be given to private mall developers, such as Sembler, to help cover their construction costs. But the Sembler bill apparently would change that, though it doesn’t specifically amend the sales tax law.

"The more specific legislation generally supersedes the more general legislation," state Department of Revenue spokeswoman Adrienne Fairwell told The Nerve this week. "Likewise, the more recent legislation usually supersedes older legislation."

Historically, about half of the state’s general fund budget has been spent on education, though more than $700 million has been slashed from K-12 school budgets in less than two years. The state’s 85 school districts have cut about 1,400 teaching jobs this year.

Contacted this week by The Nerve about the Sembler bill, S.C. Department of Education spokesman Jim Foster said, "While you’ve got to acknowledge that economic development is critically important for that area of South Carolina, it obviously would be a concern if several million dollars in K-12 funds were cut."

"But at this point, that would be like throwing another bucket of water on somebody who’s already drowning because public schools have already taken more than $700 million in cuts over the past 22 months," Foster continued. "The big issue continues to be … this ongoing practice of making piecemeal changes to state tax policy instead of looking at the big picture in any kind of comprehensive way."

William Gillespie, chief economist for the state Board of Economic Advisors, presumably assumed the legality of the Sembler bill in drafting a required estimated fiscal impact statement on the bill.

In his report, he said the proposed sales tax refunds would apply to the first 4 cents of the sales tax, not the 1 cent earmarked under the Education Improvement Act or the 1 cent authorized for property tax relief.

Gillespie found that the bill, if enacted, would result in an estimated $22.5 million loss in sales tax revenue over the next five fiscal years because it would "shift sales from existing retailers and not add to sales that would otherwise occur in the absence of the provision."

"Because the facility adds to an already well-established retail sector, it is difficult to expect that the facility would create new sales," Gillespie wrote.

Sembler-Tailored Bill

Contacted this week by The Nerve, state Sen. Tom Davis, R-Beaufort, who spoke against the bill on the Senate floor last week, said he was not aware of the specifics of the sales tax law cited in the bill, though he added that any potential conflicts with the law likely would be resolved in favor of the bill.

Davis said the interpretation problem reflects his overall concern that the proposed refunds would divert money from the state budget at a time when core services, such as keeping prisons operating, have been slashed.

Lawmakers have to fill a hole of at least $560 million in next year’s general fund budget, which is projected to be about $5.1 billion. That gap is estimated to grow to about $1 billion in 2011-12 with the loss of federal stimulus money.

Davis said to his knowledge, no retail developer has ever received sales tax rebates to help pay for a project. He said the way the Sembler bill has been drafted, he doubts any other future retail projects will be eligible within the five-year qualifying period under the bill.

"Only Sembler can comply with this," he said.

Unlike previous legislation, the Sembler bill allows counties that create "multicounty business parks" to reserve part or all of a park as a "designated economic development site for extraordinary commercial facilities."

That, in turn, triggers sales tax refunds to the company controlled by Mel Sembler, a former finance chairman of the Republican National Committee who played key roles in the election of presidents George H.W. Bush and George W. Bush.

The approximate 1.6 million-square-foot Okatie Crossings mall, which is pitched as an upscale shopping destination, would be located on about 280 acres off Interstate 95 near the towns of Hardeeville and Bluffton. Sembler officials have said it plans to invest $400 million in the project and hire as many as 2,500 workers.

Easy Terms

According to Pinckney, the Sembler bill was co-written by Burnie Maybank, an attorney with South Carolina’s go-to economic development law firm of Nexsen Pruet and the former state Department of Revenue director.

The Nerve’s review of the bill found that it would be relatively easy for Sembler to receive the sales tax rebates. For example:

Sembler would have to initially employ 1,250 workers in the first year, not 2,500 employees as announced. In subsequent years under the 15-year agreement, the mall would have to employ an average of 625 workers per quarter to receive the quarterly refunds. The bill doesn’t specify how those jobs are counted or verified; it says only that a county must have an agreement with the retail developer that includes an "annual certification of compliance."

Sembler would not have to pay any penalty, or "clawback," if it doesn’t meet its minimum job-creation targets. Under the bill, future sales tax refunds would be suspended, and the county – not Sembler – would have to repay a portion of the remitted refunds to the state Department of Revenue based on how close the mall came to meeting the minimum requirements.

The mall has to generate $6 million in sales taxes each year, "based on an annualized number using the two most recent quarters." That means, for example, that Sembler could be eligible for the sales tax refunds if the mall remitted $3 million in sales taxes in the last two quarters and no taxes in the first two.

Sen. Davis brought up several other points when the bill was debated initially last week on the Senate floor:

The definition of a new full-time job is changed under the bill to allow jobs that are shifted from other work places in South Carolina.

Sembler has to invest $200 million – not $400 million as announced – to be eligible for the sales tax refunds. And the bill changes state law to allow the required capital investment to include other revenue sources, such as the proceeds of special source revenue bonds sold by Jasper County, and the value of improvements made by mall tenants.

The bill does away with a requirement that the state Coordinating Council for Economic Development do a cost-benefit analysis on the project.

Davis said last week he plans to go into more detail on the bill when the Senate takes it up again.